Retirement Savings: What's The Easiest Way To Save $1 Million?

Be honest. Either up front or in the back of your mind, when you think about retirement savings you're wondering how long it would take to save $1 million. Or if it's even possible.

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The answer to the second question is yes, it is possible. And you don't have to sock away huge sums of money to achieve that retirement savings goal — unless you don't start to save until you're too close to retirement. The answer to the first question is, You can do it within a normal career span.

Perhaps surprising to a lot of workers, you can reach this retirement savings benchmark by ponying up just an average amount of savings each year.

Take a look. The average size of annual contributions to IRAs in the custody of Fidelity Investments was $4,281 as of Dec. 31, according to spokesman Michael Shamrell.

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Retirement Savings Success

Suppose you're fresh out of college or grad school. Starting from scratch at age 25, you have zero in your IRA. But each year you kick in $4,281. Let's say you do that in equal monthly contributions of $356.75.

Now imagine that your IRA investments grow at an average annual rate of 7%. That's a reasonable assumption. The $404 billion Vanguard 500 Fund (VFINX), which tracks the S&P 500 index of prominent big-cap stocks, averaged a 9.46% annual gain over the 15 years going into Tuesday, says Morningstar Inc. From 1926 through April 30 of this year, small-cap stocks did even better, galloping ahead at a 12.07% yearly pace.

At a 7% average annual pace, by age 67 when you might retire, your IRA balance would be $1.169 million, according to an investment growth calculator at the Securities and Exchange Commission's investor.gov website.

In fact, your balance would top $1 million by the end of the year when you turn 65.

So over the course of a work career of normal length, you can build a retirement account balance of $1 million. You can do it with average-size yearly contributions to your IRA. And you can do it if the market actually underperforms its long-term average rate of growth.

But what happens if the market grows even more slowly? Let's assume it grows at a 4.5% annual clip. That's the pace that Fidelity uses in some of its retirement savings planning assumptions.

At that rate, by age 67 your nest egg would grow just short of half as big. The ending balance at age 67 would be only $561,194.

Building A Retirement Nest Egg

So, your ability to build a $1 million balance depends on how well the market does each year. "It also depends on how early you start to save and invest," said Meghan Murphy, a retirement savings expert for Fidelity. "Generally, the later you start, the more you have to save each year."

For example, even if the market does grow 7% a year on average, if you don't start to save until, say, age 35, by age 67 your balance will be just over $595,000.

If you do wait until age 35 to start, to accumulate $1 million by age 67 you'd have to save about $648 a month if it grows an average 7% per year.

What are the keys for building a $1 million retirement account balance? Murphy offers four tips:

Start to save early. Getting an early start puts the power of compound growth to work for you. The amount you earn each year is added to your principal, so your balance does not merely grow, in effect it grows faster and faster.

Keep making annual contributions. "People who are young have a lot of competing financial obligations," Murphy said. "They're saving to buy a home, saving to pay for children's educations. But I never met an older person who said they wish they hadn't saved so early. Just the opposite. Older people often say their one regret is that they didn't save earlier."

Invest age appropriately. "When you're young, take more risk," Murphy said. That does not mean investing recklessly. "It means investing in stocks when you're young and have more time to recover from market downturns. Add fixed income as you get closer to retirement."

Consider using target date funds. If you don't want to make your own investment decisions, let a financial firm's professional money managers do the heavy lifting for you. They will also make your portfolio's mix of stocks, bonds and cash more conservative and less likely to be volatile as you age and get closer to retirement. For example, $4.5 billion Fidelity Freedom 2055 Fund (FDEEX) — which is appropriate for people who plan to work about four more decades — had 88% of its shareholders' money at work in stocks as of March 31, according to Morningstar Inc. The $29.9 billion Fidelity Freedom 2020 (FFFDX) — which is suitable for people planning to retire in about two years — was 55% invested in stocks, 31% invested in bonds and 14% parked in cash and other assets.

Notice: Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. The information has been obtained from sources we believe to be reliable; however no guarantee is made or implied with respect to its accuracy, timeliness, or completeness. Authors may own the stocks they discuss. The information and content are subject to change without notice.